Select the best answer for each of the following unrelated items. Answer each of these items in your examination booklet by giving the number of your choice. For example, if the best answer for item (a) is (1), write (a)(1) in your examination booklet. If more than one answer is given for an item, that item will not be marked. Incorrect answers will be marked as zero. Marks will not be awarded for explanations. Note: 2 marks each Note: Use the following information to answer parts (a) and (b). On December 31, 2004, CHL Inc. purchased 70% of the common shares of WAC for $700,000.

Page 2 CGA practice exam Essay

What is the amount of income RUP should report on its investment in ERT for 2005 under theequity method? 1) 2) 3) 4) $40,000 $45,000 $54,000 $60,000 d. CD Ltd. owns 800 shares (80%) of LS Inc. The fair value of LS’s identifiable net assets is greater than their carrying value today and when CD purchased its 80% interest. Which of the following would result in a decrease in the purchase price discrepancy assigned to identifiable net assets? 1) 2) 3) 4) LS issues 100 new shares and CD purchases 60 of these new shares. LS issues 100 new shares and CD purchases 90 of these new shares.

LS retires 100 of its shares, 70 of which were purchased from CD. LS retires 100 of its shares, 80 of which were purchased from CD. Note: Use the following information to answer parts (e) and (f). On January 1, 2005, REV Company purchased 100% of the voting shares of STO Company for $500,000. On the date of acquisition, data related to equipment was as follows: Equipment REV Net book value for accounting purposes Undepreciated capital cost (UCC) for tax purposes Fair value STO $ 800,000 700,000 1,000,000 $ 600,000 550,000 700,000

The equipment is being amortized for accounting purposes on a straight-line basis. At the date of acquisition, the equipment for both companies had a remaining useful life of 5 years and no residual value. For tax purposes, CCA is calculated using a rate of 20%. Both companies pay income tax at the rate of 40%. e. Assume that this business combination is to be accounted for under the new-entity method. What is the carrying value of the equipment on the consolidated balance sheet at January 1, 2005? 1) 2) 3) 4) f. $1,400,000 $1,500,000 $1,600,000 $1,700,000

The building was completed on November 30, 2005, but none of the water treatment equipment had yet been installed. The city uses a fund accounting system and maintains separate funds for general operations and capital projects. It uses an encumbrance system to control operating and capital costs. The following table summarizes the financial activities related to the water treatment plant for the year ended December 31, 2005: Nature of Costs Engineering Building Equipment Total Budget Value of Purchase Orders Issued Value of Purchase Orders Outstanding Actual Cost of Work Completed Amount Paid on Work

Completed $ 2,000,000 5,000,000 3,000,000 $ 10,000,000 $ 2,100,000 5,200,000 2,860,000 $ 10,160,000 $ 200,000 0 2,860,000 $ 3,060,000 $ 1,800,000 5,350,000 0 $ 7,150,000 $ 1,500,000 4,815,000 0 $ 6,315,000 Purchase orders have been issued to cover all work required to complete the facility. The work has not yet commenced on the activities for which purchase orders are currently outstanding but work has been completed on all of the other purchase orders. All of the engineering work completed to date relates to the building. The outstanding engineering work relates to the water treatment equipment.

On October 1, 2005, GOL Limited purchased 15% of the common shares of SIL Corp. for $100,000 cash. On December 31, 2005, GOL’s year end, the fair value of the investment in SIL was $109,000. SIL reported income of $20,000 for the quarter ended December 31, 2005 and $25,000 for the quarter ended March 31, 2006, and paid a dividend of $40,000 on February 14, 2006. On April 1, 2006, GOL sold the investment in SIL for $112,000. GOL has adopted the new Handbook section 3855, on Financial Instruments — Recognition and Measurement, and uses settlement-date accounting for its investments in financial assets where applicable.

Required Prepare all journal entries related to GOL’s investment in SIL, starting with the purchase of the shares and ending with the sale of the shares, under the following conditions: 6 5 26 a. GOL designates the equity investment as an available-for-sale investment. b. GOL designates the equity investment as a held-for-trading investment. Question 3 On December 31, 2001, PIE Company purchased 70% of the outstanding common shares of SKY Company for $2 million in cash. On that date, the shareholders’ equity of SKY totalled $1. 5 million and consisted of $1 million in common shares and $0. million in retained earnings. For the year ending December 31, 2005, the income statements for PIE and SKY were as follows: PIE $ 8,000,000 500,000 8,500,000 5,800,000 800,000 1,050,000 340,000 $ 510,000 Sales Interest and investment income Cost of goods sold Amortization expense Other expenses Income tax expense Net income SKY $ 5,000,000 100,000 5,100,000 3,500,000 630,000 570,000 160,000 $ 240,000 As at December 31, 2005, the condensed balance sheets for the two companies were as follows: PIE SKY Total assets $ 9,000,000 $ 5,500,000 Liabilities Common shares Retained earnings Total $ 5,000,000 2,100,000 ,900,000 $ 9,000,000 $ 3,800,000 1,000,000 700,000 $ 5,500,000 Additional information 1. On December 31, 2001, SKY owned a building with a fair value that was $200,000 greater than its carrying value. The building had an estimated remaining useful life of 14 years and was being amortized on a straight-line basis. 2. On December 31, 2001, SKY had inventory with a fair value that was $80,000 more than its carrying value. SKY uses the LIFO method of inventory valuation. SKY’s inventory increased in all years except for 2005, when it decreased to a level substantially below the inventory on hand at the end of 2001.

There was no change in the estimated service life or salvage value at the time of the intercompany sale. 5. During 2005, PIE sold merchandise to SKY for $200,000, a price that includes a gross profit of $50,000. SKY resold 40% of this inventory during 2005 and realized a further gross profit of $35,000. The other 60% remains in SKY’s year-end inventory. On December 31, 2004, the inventories of SKY included merchandise purchased from PIE on which PIE had recognized a gross profit in the amount of $20,000. 6. During 2005, PIE declared and paid dividends of $400,000, and SKY declared and paid dividends of $150,000. . PIE accounts for its investment in SKY using the cost method. 8. Both companies pay income taxes at the rate of 40%. Ignore future income taxes when allocating and amortizing the purchase price discrepancy. Required 15 a. Prepare a consolidated income statement for 2005. Show your supporting calculations in good form. 3 b. Explain how cost of goods sold and noncontrolling interest on the consolidated income statements for 2002 and 2005 would change if SKY had used the FIFO method of inventory valuation. 8 c. EFA4D05 Now assume that PIE uses the equity method to account for its investment in SKY.

BAR acquired LEY to secure a reliable source of transistors for use in its computers and office equipment. Most of LEY’s raw material and labour are purchased locally in Singapore. In order to satisfy the extra demand from BAR, LEY built a new manufacturing plant in Singapore in 2004. The plant was financed with a loan from BAR. The loan is denominated in Canadian dollars, is interest free, and is repayable in equal principal payments over 30 years commencing on December 31, 2005. The condensed closed trial balance of LEY for the year ending December 31, 2005 was as follows: Cash Accounts receivable

It was established on January 1, 2005 to provide counseling services and a drop-in centre for single mothers. On January 1, 2005, the centre leased an old warehouse in the central part of Smallville for $2,000 per month. It carried out minor renovations in the warehouse to create a large open area for use as a play area for children and three offices for use by the executive director and counselors. The lease runs from January 1, 2005 to June 30, 2007. By that time, the centre hopes to move into new quarters that are more suitable for the activities carried out by the centre.

Additional information 1. The provincial government agreed to provide an operating grant of $50,000 per year. In addition, the government has pledged to match contributions collected by the centre for the purchase of land for construction of a new complex for the centre. The maximum contribution by the government towards the purchase of the land is $100,000. 2. The centre has signed an agreement to purchase a property in the downtown area of Smallville for $225,000. There is an old house on the property, which is presently used as a rooming house. The closing date is anytime between July 1, 2006 and December 31, 2006.

The centre plans to demolish the existing house and build a new complex. 3. The centre has recently commenced a fundraising program to raise funds to purchase the land and construct a new building. So far, $28,000 has been raised from individuals towards the purchase of the land. In the new year, the centre will focus its efforts to solicit donations from businesses in the area. The provincial government will advance the funds promised under its pledge on the closing date for the purchase of the property. 4. All the people working for the centre are volunteers except for the executive director and the counselors.

Compare by observing differences. Stress the dissimilarities of qualities or characteristics. (Also Distinguish between) Express your own judgment concerning the topic or viewpoint in question. Discuss both pros and cons. Clearly state the meaning of the word or term. Relate the meaning specifically to the way it is used in the subject area under discussion. Perhaps also show how the item defined differs from items in other classes. Tell the whole story in narrative form. Give a drawing, chart, plan or graphic answer. Usually you should label a diagram. In some cases, add a brief explanation or description.

This calls for the most complete and detailed answer. Examine and analyze carefully and present both pros and cons. To discuss briefly requires you to state in a few sentences the critical factors. This requires making an informed judgment. Your judgment must be shown to be based on knowledge and information about the subject. (Just stating your own ideas is not sufficient. ) Cite authorities. Cite advantages and limitations. In explanatory answers you must clarify the cause(s), or reasons(s). State the “how” and “why” of the subject. Give reasons for differences of opinions or of results. Illustrate Indicate

Interpret Justify List Outline Prove Relate Review State Summarize Trace Make clear by giving an example, e. g. , a figure, diagram or concrete example. Provide a short explanation. Translate, give examples of, solve, or comment on a subject, usually making a judgment on it. Prove or give reasons for decisions or conclusions. Present an itemized series or tabulation. Be concise. Point form is often acceptable. (Also Enumerate or Identify) This is an organized description. Give a general overview, stating main and supporting ideas. Use headings and sub-headings, usually in point form. Omit minor details.

Amortization of leasehold improvements (25,000 ? 12/30) Other operating expenses (1) (1) (1) (1) 36,000 19,000 24,000 10,000 34,000 123,000 $ 14,000 Excess of revenues over expenses 4 c. FAIRCHILD CENTRE Statement of Changes in Net Assets year ended December 31, 2005 Net assets Restricted for Land purchase (1) (1) (1) (1) Balance, beginning of year Contributions for purchase of land Pledge for purchase of land Excess of revenues over expenses Balance, end of year $ 0 28,000 28,000 0 $ 56,000 Unrestricted Net Assets $ 0 14,000 $ 14,000 Total $ 0 28,000 28,000 14,000 $ 70,000 END OF SOLUTIONS 100 SFA4D05 CGA-Canada, 2005 Page 6 of 6 CGA-CANADA FINANCIAL ACCOUNTING 4 EXAMINATION December 2005 EXAMINER’S COMMENTS General Comments The overall results on this examination were unsatisfactory. In general, performance was satisfactory on accounting for investments, the mechanics of consolidation, and the translation of foreign operations. Performance was unsatisfactory on the multiple-choice questions and accounting for not-for-profit organizations. Many candidates did not properly integrate the statement of revenues and expenses with the statement of changes in net assets for the not-for-profit organization.

It is important that candidates understand the interrelationships of financial statements. It appeared that some candidates lacked an understanding of the concepts and principles supporting accounting practices, such as accounting for contributions for a not-for-profit organization and eliminating unrealized profits in intercompany transactions for consolidated financial statements. Candidates should ensure that they understand accounting procedures in terms of basic principles and concepts. In several cases, it appeared that the candidate had not read the question carefully and, as a result, did not correctly answer the question.

For example, in the foreign currency question (Question 4), many candidates calculated the cumulative exchange adjustment for 2005 rather than 2004. Specific Comments Question 1 Multiple choice (Levels 1 and 2) This question consisted of 15 multiple-choice questions on various topics and learning objectives. The overall results were unsatisfactory. Candidates had the most difficulty with parts (a) (cost method when a subsidiary has preferred shares), (b) (equity method when a subsidiary has preferred shares), (g) (GAAP for the public sector), (l) (financial statement concepts), and (m) (financial instruments).

These errors indicate a lack of understanding of the economic substance of selected transactions and the basic principles supporting accounting practices. Candidates need to first understand the underlying substance of business transactions and then try to understand the accounting for these transactions. Question 2 Accounting for investments (Levels 1 and 2) The overall results on this question were satisfactory.

Those with a good understanding of the new accounting requirements did quite well on this question; however, those without a good understanding of the new requirements had difficulty. Most candidates correctly determined the journal entry to record the purchase of the investment in SIL shares. However, many candidates did not properly account for the receipt of dividends because they credited “Investment in SIL” rather than “Dividend income”. For part (a), many candidates did not correctly account for “Other comprehensive income” at the end of 2005 or at the date of sale of the investment.

Incorrectly calculating the effect of the gain on the sale of the machine on consolidated amortization expense, consolidated income tax expense, and on the investment account under the equity method Incorrectly adjusting for realized profits from beginning inventory when calculating the investment account under the equity method Adding rather than subtracting (and vice versa) the adjustments for unrealized profits when calculating cost of goods sold Not adjusting for the after-tax realized gain (through usage) of the machine when calculating noncontrolling interest on the consolidated income statement.

Also, adjusting for unrealized profit in beginning and ending inventory when calculating noncontrolling interest on the consolidated income statement. Because these sales were “downstream,” they would have had no effect on noncontrolling interest. Not understanding the impact on noncontrolling interest and not differentiating between 2002 and 2005 when explaining the impact of changing from LIFO to FIFO for the amortization of the purchase discrepancy related to inventory These errors indicate a lack of understanding of the interrelationships of financial statement items such as inventory, income taxes, and

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